Hillshire Brands Reports Solid Start To Fiscal 2014

The Hillshire Brands Company (NYSE: HSH) today reported results for its
first quarter of fiscal year 2014.

Investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements, and the company wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Hillshire Brands' actual results to differ from such forward-looking statements are those described under Item 1A, Risk Factors, in Hillshire Brands' most recent Annual Report on Form 10-K, as well as factors relating to:

The consumer marketplace, such as (i) intense competition, including advertising, promotional and price competition; (ii) changes in consumer behavior due to economic conditions, such as a shift in consumer demand toward private label; (iii) fluctuations in raw material costs, Hillshire Brands' ability to increase or maintain product prices in response to cost fluctuations and the impact on profitability; (iv) the impact of various food safety issues and regulations on sales and profitability of Hillshire Brands' products; and (v) inherent risks in the marketplace associated with product innovations, including uncertainties related to execution and trade and consumer acceptance;

Hillshire Brands' relationship with its customers, such as (i) a significant change in Hillshire Brands' business with any of its major customers, such as Wal-Mart, its largest customer; and (ii) credit and other business risks associated with customers operating in a highly competitive retail environment;

Hillshire Brands' spin-off of its international coffee and tea business in June 2012, including potential tax liabilities and other indemnification obligations; and

Other factors, such as (i) Hillshire Brands' ability to generate margin improvement through cost reduction and productivity improvement initiatives; (ii) Hillshire Brands' credit ratings, the impact of Hillshire Brands' capital plans on such credit ratings and the impact these ratings and changes in these ratings may have on Hillshire Brands' cost to borrow funds and access to capital/debt markets; and (iii) the settlement of a number of ongoing reviews of Hillshire Brands' income tax filing positions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which Hillshire Brands transacts or has transacted business.

Income Statement Summary: Reported to Adjusted

For the Three Months ended September 28, 2013 and September 29, 2012 (in millions, except per share data—unaudited)

Three Months ended

September 28, 2013

September 29, 2012

Reported

SignificantItems

Adjusted (1)

Reported

SignificantItems

Adjusted (1)

Continuing Operations:

Retail

$

714

$

714

$

719

$

719

Foodservice/Other

270

270

255

255

Net sales

984

984

974

974

% change from prior year

1.0

%

1.0

%

Cost of Sales

719

3

716

680

3

677

Gross Profit

265

(3

)

268

294

(3

)

297

Gross Margin

27.0

%

27.3

%

30.2

%

30.5

%

SG&A

MAP

40

—

40

46

—

46

SG&A (excluding MAP)

167

15

152

167

17

150

Net charges (gain) for exit activities, asset and business dispositions

3

3

—

(3

)

(3

)

—

Total operating income

55

(21

)

76

84

(17

)

101

% change from prior year

(35.2

)%

(24.4

)%

Operating Margin

5.6

%

7.8

%

8.7

%

10.4

%

Net interest expense

11

—

11

9

—

9

Income tax expense (benefit)

15

(7

)

22

26

(6

)

32

Net income

$

29

$

(14

)

$

43

$

49

$

(11

)

$

60

% change from prior year

(40.3

)%

(27.0

)%

Net Margin

3.0

%

4.4

%

5.0

%

6.1

%

Reconciliation from operating segment income to operating income:

Retail

$

60

$

60

$

84

$

84

Foodservice/Other

25

25

25

25

Operating segment income

85

85

109

109

General corporate expenses

(25

)

(15

)

(10

)

(31

)

(19

)

(12

)

Mark-to-market derivative gains/(losses)

2

—

2

5

—

5

Amortization of trademarks/intangibles

(1

)

—

(1

)

(1

)

—

(1

)

Significant items - business segments

(6

)

(6

)

—

2

2

—

Total operating income

$

55

$

(21

)

$

76

$

84

$

(17

)

$

101

Average Shares Outstanding

Basic

123

123

122

122

Diluted

125

125

123

123

Earnings per share

Basic

$

0.24

$

(0.11

)

$

0.35

$

0.40

$

(0.09

)

$

0.49

% change from prior year

(40.0

)%

(28.6

)%

Diluted

$

0.23

$

(0.12

)

$

0.35

$

0.40

$

(0.09

)

$

0.49

% change from prior year

(42.5

)%

(28.6

)%

(1) Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.

Net Sales Bridge

For the Three Months ended September 28, 2013 (unaudited)

The following table illustrates the components of the change in net sales versus the prior year:

First Three Months ended September 28, 2013

Retail

Foodservice/

Other

Total

Company

Volume

(0.6

)%

0.3

%

(0.3

)%

Price/Mix

(0.2

)

5.4

1.2

Organic sales change

(0.8

)

5.7

0.9

Acquisitions

0.1

—

0.1

Total Net Sales Change

(0.7

)%

5.7

%

1.0

%

See detailed explanation of this and other non-GAAP measures in this release.

Condensed Consolidated Balance Sheet Data

At September 28, 2013 and June 29, 2013 (in millions—unaudited)

September 28, 2013

June 29, 2013

Assets

Cash and equivalents

$

176

$

400

Short term investments

193

—

Trade accounts receivable, less allowances

223

219

Inventories

327

313

Current deferred income taxes

73

71

Income tax receivable

4

18

Other current assets

88

85

Total current assets

1,084

1,106

Property, net of accumulated depreciation of $1,205 and $1,185, respectively

809

818

Trademarks and other identifiable intangibles

136

121

Goodwill

371

348

Deferred income taxes

16

20

Other noncurrent assets

23

21

$

2,439

$

2,434

Liabilities and Equity

Accounts payable

$

304

$

295

Accrued liabilities

349

357

Current maturities of long-term debt

111

19

Total current liabilities

764

671

Long-term debt

840

932

Pension obligation

116

119

Other liabilities

228

228

Equity

Hillshire Brands common stockholders’ equity

491

484

$

2,439

$

2,434

Consolidated Statements of Cash Flows

For the Three Months ended September 28, 2013 and September 29, 2012 (in millions—unaudited)

Three Months ended

September 28, 2013

September 29, 2012

Operating activities -

Net income

$

29

$

53

Adjustments to reconcile net income to net cash from operating activities:

Depreciation

33

39

Amortization

4

4

Net gain on business dispositions

—

(9

)

Pension contributions, net of income/expense

(2

)

(3

)

Increase (decrease) in deferred income taxes

(4

)

8

Other

7

—

Changes in current assets and liabilities, net of businesses acquired and sold:

Trade accounts receivable

(3

)

13

Inventories

(13

)

(40

)

Other current assets

(2

)

10

Accounts payable

1

(55

)

Accrued liabilities

(9

)

(31

)

Accrued taxes

18

16

Net cash from operating activities

59

5

Investing activities—

Purchases of property and equipment

(23

)

(35

)

Purchases of software and other intangibles

(2

)

(1

)

Acquisition of businesses

(35

)

—

Dispositions of businesses and investments

—

16

Cash from (used in) derivative transactions

(3

)

5

Cash used to invest in short-term investments

(193

)

—

Sales of assets

—

1

Net cash used in investing activities

(256

)

(14

)

Financing activities—

Issuances of common stock

2

27

Purchase of common stock

(10

)

—

Repayments of other debt and derivatives

(4

)

—

Payments of dividends

(15

)

—

Net cash from (used in) financing activities

(27

)

27

(Decrease) / Increase in cash and equivalents

(224

)

18

Cash and equivalents at beginning of year

400

235

Cash and equivalents at end of period

$

176

$

253

Supplemental cash flow data:

Cash paid for restructuring actions

$

21

$

27

Cash contributions to pension plans

1

2

Cash paid for income taxes

—

4

Significant Items

Three Months ended September 28, 2013 and September 29, 2012 (in millions, except per share data—unaudited)

Quarter Ended September 28, 2013

Quarter Ended September 29, 2012

(In millions except per share data)

Pretax

Impact

Net

Income (Loss)

Attributable to

Hillshire Brands (2)

Diluted

EPS

Impact (1)

Pretax

Impact

Net

Income (Loss)

Attributable to

Hillshire Brands (2)

Diluted

EPS

Impact (1)

Continuing Operations:

Restructuring actions:

Severance/ retention costs

$

(3

)

$

(2

)

$

(0.02

)

$

—

$

—

$

—

Lease & contractual obligation exit costs

—

—

—

(3

)

(2

)

(0.01

)

Consulting/advisory & other costs

(14

)

(9

)

(0.07

)

(8

)

(5

)

(0.04

)

Income from asset dispositions

—

—

—

5

3

0.03

Accelerated depreciation

(5

)

(3

)

(0.03

)

(11

)

(7

)

(0.06

)

Total restructuring actions

(22

)

(14

)

(0.11

)

(17

)

(11

)

(0.08

)

Reimbursed claim proceeds

2

1

0.01

—

—

—

Acquisition advisory & other costs

(1

)

(1

)

(0.01

)

—

—

—

Impact of significant items on income (loss) from continuing operations

(21

)

(14

)

(0.12

)

(17

)

(11

)

(0.09

)

Discontinued operations:

Consulting, advisory & other costs

—

—

—

(1

)

—

(0.01

)

Gain on the sale of discontinued operations

—

—

—

3

2

0.02

Impact of significant items on income from discontinued operations

—

—

—

2

2

0.01

Impact of significant items on net income (loss) attributable to Hillshire Brands

$

(21

)

$

(14

)

$

(0.12

)

$

(15

)

$

(9

)

$

(0.08

)

Impact of significant items on income from continuing operations before income taxes

Cost of sales

$

(3

)

$

(3

)

Selling, general and administrative expenses

(15

)

(17

)

Exit and business dispositions

(3

)

3

Total

$

(21

)

$

(17

)

Notes:

(1)

EPS amounts are rounded to the nearest $0.01 and may not add to the total.

(2)

Taxes computed at applicable statutory rates.

Explanation of Non-GAAP Financial Measures

Management measures and reports Hillshire Brands’ financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). In this release, Hillshire Brands highlights certain items that have significantly impacted the company’s financial results and uses several non-GAAP financial measures to help investors understand the financial impact of these significant items. Other companies may calculate these non-GAAP financial measures differently than Hillshire Brands.